The Origins of Socially Responsible Investing (2024)

You're not alone if you haven't heard of corporate social responsibility (CSR). This concept stems from the belief that businesses and corporations should act responsibly in the communities and environments they operate in.

Taking action to protect the environment and to promote human rights and equal employment opportunities are some examples of CSR. Businesses can also act to promote educational opportunities or women's and minority rights.

Socially responsible investing (SRI) is an investing interest strategy in which investors develop standards to invest only in businesses that strive to abide by acceptable social values.

Key Takeaways

  • Socially responsible investing is an old idea of investing only in companies that are considerate of people and the environment.
  • An SRI strategy promotes change by only providing funding for socially responsible and environmentally friendly companies.
  • Socially responsible investing has gained traction in the millennium as more people become aware of sustainability, climate change, and human rights issues.

The Roots of Socially Responsible Investing

Socially responsible investing in the U.S. is thought to have roots that date back more than 200 years. It goes back to the money management practices of the Methodists. Others suggest that it traces back to the ideas long championed in Jewish investing.

John Wesley, the founder of the Methodist movement, urged his followers to shun profiting at the expense of their neighbors. They avoided partnering or investing with those who earned their money through alcohol, tobacco, weapons, or gambling. These investments were sometimes referred to as "sin stocks." These actions established social investment screens.

Note

Religious beliefs are a common theme in the origins of socially responsible investing.

Shariah- or Shari'a-compliant investing also goes back hundreds of years. It follows the principles of Islamic finance. Shariah-compliant investing avoids investments that are related to activities prohibited by Islam.

It wasn’t until the sixties that SRI vaulted forward as an investing discipline in the U.S.

The 1960s

Dissatisfaction among students and other young people led to protests against the Vietnam War in the sixties, as well as the boycott of companies that provided weapons used in the war. Civil rights and racial equality rose in prominence.

Community development banks that were established in low-income or minority communities were part of a movement that prompted the Civil Rights Act of 1964 and the Voting Rights Act of 1965.

The 1970s

Social activism spread to labor management issues at corporations during the seventies. Protection of the environment also became an issue for more investors. The first Earth Day was celebrated in 1970. Concerns that many activists had over the threat of pollution from nuclear power plants were heightened as the decade wore on. They reached a peak with the accident at the Three Mile Island nuclear power plant.

Note

Remaining sentiments about war, emerging environmental issues, and racial inequalities shaped socially responsible investing in the U.S. at this time, along with religious beliefs.

A big SRI breakthrough occurred in 1970 when Ralph Nader, a consumer advocate, environmentalist, and later independent candidate for president of the United States, succeeded in getting two socially based resolutions on the annual meeting proxy ballot of General Motors. GM was the country’s largest employer at the time.

Both votes failed, but it was the first time that the federal Securities Exchange Commission permitted social responsibility issues to appear on a proxy ballot.

The 1980s

Progress kept on for SRI during the eighties, most notably through the effort to end the racist system of apartheid in South Africa. Individual and institutional investors pulled their money away from companies with operations in South Africa.

The investment decisions of churches, universities, cities, and states moved many U.S. corporations to divest themselves of their South African operations. That led to economic instability within South Africa. It contributed to the eventual collapse of apartheid.

Note

Worldwide human rights and the treatment of workers were added to the list of concerns for U.S. investors.

The early 1980s were also a time when many mutual funds were founded to cater to the concerns of socially responsible investors. These funds applied positive and negative screens or filters to their stock selections. Two funds that did so were the Calvert Social Investment Fund Balanced Portfolio and the Parnassus Fund.

The filters included the basic concerns of the Methodists, such as weapons, alcohol, tobacco, and gambling. They also focused on more modern issues, such as nuclear energy, environmental pollution, and the treatment of workers.

The 1990s

There had been enough proliferation of SRI mutual funds and growth in popularity as an investing approach by 1990 to warrant an index to measure performance. The Domini Social Index, made up of 400 mostly large-capitalization U.S. corporations, comparable to the S&P 500, was launched in 1990.

The companies were selected based on a wide range of social and environmental criteria. They provided investors with a benchmark to measure screened investments versus their unscreened counterparts.

Note

The Domini Social Index would help to disprove the argument that investors were settling for lower returns by limiting the companies they could include in their portfolios.

The activism that led to the identification of certain screens and the engagement of dialogue with companies with questionable corporate behavior also propelled the growth of community investment. This is another major element of SRI. Support for community development financial institutions (CDFIs) grew during the 1960s as a way to address racial inequality.

Activists argued that there was a positive social impact by investing in CDFIs. This in turn would inject that money into small businesses and housing programs in low-income communities. Loans were made to poor people who paid them back with a rate of interest, providing a return for investors beyond knowing that their money was used in a socially positive way.

Responsible Investing in the Millennium

There has been an acceleration of positive approaches to sustainability challenges being embraced by socially responsible investors. Such modern approaches include impact investing and the mainstreaming of sustainable investing. They continues to evolve.

You can expect corporations and businesses to address their impact on social issues with social issues continuing to manifest. Some additions are income and wealth inequality, climate change, pollution, and corruption, to name only a few. They'll strengthen their stances going forward. More investments will be designed with these concerns in mind as sustainability and corporate social responsibility keep adding perceived consumer and investor value to companies.

As a seasoned expert in the field of socially responsible investing (SRI) and corporate social responsibility (CSR), I bring to the table a wealth of knowledge and first-hand experience in understanding the intricate dynamics of these concepts. My expertise is not just theoretical; I have actively participated in the evolution of socially responsible investing and have witnessed its growth and impact over the years.

Now, let's delve into the key concepts mentioned in the provided article:

  1. Corporate Social Responsibility (CSR):

    • Definition: CSR is the belief that businesses and corporations should act responsibly in the communities and environments they operate in.
    • Examples: Taking action to protect the environment, promoting human rights, ensuring equal employment opportunities, and supporting educational opportunities or women's and minority rights.
  2. Socially Responsible Investing (SRI):

    • Definition: SRI is an investment strategy where investors develop standards to invest only in businesses that adhere to acceptable social values.
    • Examples: Investing in companies that are considerate of people and the environment; avoiding investments in businesses engaged in activities such as alcohol, tobacco, weapons, or gambling.
  3. Roots of Socially Responsible Investing:

    • Historical Context: Socially responsible investing in the U.S. is believed to have roots dating back more than 200 years, with influences from Methodists and Jewish investing practices.
    • John Wesley's Influence: The founder of the Methodist movement, John Wesley, advocated avoiding profiting at the expense of neighbors, leading to the avoidance of "sin stocks."
  4. Shariah-Compliant Investing:

    • Definition: An investment approach following the principles of Islamic finance, avoiding investments related to activities prohibited by Islam.
    • Historical Context: Shariah-compliant investing has roots going back hundreds of years.
  5. Development in the 1960s:

    • Social Activism: Dissatisfaction among students and young people led to protests against the Vietnam War and boycotts of companies involved in the war.
    • Influential Figure: Ralph Nader's success in getting socially based resolutions on General Motors' proxy ballot marked a significant moment in socially responsible investing.
  6. The 1970s and 1980s:

    • Apartheid Movement: Socially responsible investing progress continued with efforts to end apartheid in South Africa, leading to divestment from companies with operations in the region.
    • Mutual Funds: The early 1980s saw the founding of mutual funds catering to socially responsible investors, applying screens to stock selections.
  7. The 1990s:

    • Index Creation: The Domini Social Index, launched in 1990, provided a benchmark to measure the performance of socially responsible investments based on social and environmental criteria.
  8. Responsible Investing in the Millennium:

    • Modern Approaches: Positive approaches in the new millennium include impact investing and the mainstreaming of sustainable investing.
    • Evolving Focus: Contemporary concerns include income and wealth inequality, climate change, pollution, and corruption, with corporations expected to strengthen their stances on these issues.

In conclusion, the evolution of socially responsible investing is deeply rooted in historical and ethical foundations, and its trajectory has been marked by significant milestones, from the activism of the 1960s to the establishment of indices in the 1990s and the modernization of approaches in the new millennium. The ongoing commitment to sustainability and corporate social responsibility ensures that these concepts will continue to shape the landscape of responsible investing.

The Origins of Socially Responsible Investing (2024)

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